At risk of being accused (and justifiably so) of being Johnny One-Note, this is the third consecutive post on Coventry. While the other two were focused on their recent moves to enhance customer relations, this one is specific to the company’s Q3 financials.
Which were not good.
Despite statements to the contrary, it looks like Coventry isn’t exactly sure where the problems lie and how its efforts to resolve those problems are doing – it has canceled the annual December Investor day conference and won’t be releasing detailed guidance until some time in January. Listening to the conference call and particularly management’s response to analysts’ questions, I was struck by the continued, and almost exclusive, focus on pricing and underwriting, and its corollary – a lack of focus on the issues, factors, disease states, and medical management deficiencies driving medical costs (which are trending higher than Coventry projected early this year.
This isn’t a new finding – neither Coventry, nor the analysts following the firm, have paid any attention to medical cost drivers in past calls.
I’ll leave further analysis of the group health, Medicare, Medicaid, and individual business for a later date, and focus today on the work comp numbers. Note that workers comp is a pretty small part of Coventry, accounting for about 7% of total revenues.
To begin, Coventry reduced projected 2008 eps by $0.19 for “Lower than expected business volumes (risk revenue, workers’ compensation fees)”. Obviously some portion of that take down was due to comp; the question is, how much?
For that, we can dig into the financials. Coventry recently began reporting its work comp and network rental business on the same line, making it a bit harder to precisely determine work comp revenue. By reviewing financials reported prior to the accounting change, it looks like the network rental business generated about $18 million in revenue in Q3, 2007. Assuming that the network rental business accounts for $20 million per quarter, here’s my best guess as to work comp revenue.
– Q2 2007 – $157 million
– Q3 2007 – $157 million
– Q4 2007 – $163 million
– Q1 2008 – $172 million
– Q2 2008 – $190 million
– Q3 2008 – $194 million
That looks like pretty solid revenue growth; up almost 24% over the same quarter in the prior year, with a good chunk of that coming from additional PBM sales (which result in a disproportionate increase in top line as ‘revenues’ include drug costs).
But that wasn’t what Coventry was looking for. Earlier statements from management indicated they were expecting work comp to grow even faster, driven by price increases, additional sales of their PBM services, and ‘account rounding’ – requiring customers to use Coventry’s network in all jurisdictions (where they can convince their customers to agree).
While the network, bill review, and pharmacy benefit management sectors appear to be growing nicely, some of the ancillary lines are not. The MSA business continues to struggle, as does case management. And there are some pretty substantial headwinds – the recession has, and will continue to, drive down injury rates. Without injured workers there aren’t bills to be paid and ‘savings’ to profit from. Carriers and TPAs are increasingly internalizing managed care functions to capture the revenue and profits for themselves.
Chairman and CEO Dale Wolf spoke to this (in response to an analyst question), saying: “we have seen [the impact of reduced claim frequency] clearly all year; we have seen as big a drop in claims volumes as ever happens in this industry and relative to expectation this [the drop in frequency] has been most the significant shortfall relative to expectation; it impacts bill review, network, and other product lines… the business is still growing significantly…” [I may not have captured this precisely but it’s pretty close]
The net
Workers comp remains a solid business, likely generates high profit margins (excepting the PBM product), and will continue to grow. If the recession deepens, which appears more likely than not, expect work comp revenue growth to continue to disappoint.
Oct
22
Coventry and many other MCO’s should be placing more focus on collaborating with providers to manage the actual care of patients, as opposed to managing the administrative processes that govern the care. I’m still waiting for Managed Care 2.0 to take shape.
I’ve had very strong “feelings” that the mess with Coventry isn’t over and that there are major changes coming. Coventry employees in San Antonio are being told to attend a meeting call, it IS MANDATORY. Obviously there is some information that will be affecting employees as well.